About Tax Provisioning and how to simplify the process with a unified EPM solution
Within many corporate businesses, tax provisioning is a place where two worlds collide: finance and tax specialists. When using separate EPM solutions, corporate finance typically delivers figures to the tax pros so they can make the necessary tax adjustments, which can be a complicated process by itself. When the finance department has late changes and adjustments in their financial reporting, the tax specialist can start all over again. We will show you how you can integrate these two worlds and improve efficiency, accuracy and the speed of tax reporting.
What is Tax Provisioning?
The provision for income tax is the amount of income tax a company expects to pay. This amount is calculated based on the company’s net income plus permanent and temporary adjustments. In other words, it's an overview of the company's tax liability which has to be included on the balance sheet and the income statement.
Businesses estimate their income taxes every quarter, but the real tax bill, paid annually, can be higher or lower than these estimates. That's why a quarterly tax provision is provisional - it's an estimate, not an exact figure.
When companies have multiple entities in different companies, they are obliged to pay tax according to multiple legislations. This complicates the process and they need tax professionals to estimate the tax provision.
Why does Tax Provisioning matter?
Corporate holdings have to report their tax provision on the balance sheet as it is a liability. This is useful information for investors. Company executives have a responsibility to maximize shareholder returns, and the tax provision shows investors whether or not the company manages its taxes properly.
A tax provision can also be the basis for financial decision-making. Multinational companies have sophisticated tax strategies that boost their profitability and competitive advantage. With changing legislation and quickly developing markets, it is important to assess this strategy every year and to take it into account when - for example - deciding on entering new markets.
How is Tax Provisioning performed?
Thorough tax knowledge is needed to calculate tax provisioning. You should always seek an accountant's advice before attempting your own tax provision. In simple terms, you complete a tax provision by:
- Adjusting the net reported income with temporary and permanent differences
- Multiplying this adjusted income figure by the appropriate income tax rate
Temporary differences are the differences between an asset or liability's "recorded" value, and how much of the asset or liability is actually subject to taxation. Permanent differences are those that are expressed differently for tax and financial reporting purposes.
The main problem with tax provisioning is that you're working with estimates. Working with complexities, such as temporary and permanent differences, often mean there are discrepancies in the reporting of net income. Your real tax liability may be significantly higher than what you've provisioned for, which means you should only ever see tax provisioning for what it is - an approximation.
Different ways to do Tax Provisioning
Gathering data from fragmented solutions, reconciling to source systems, and reviewing detailed tax calculations in large global companies can add as much as 5 days to quarter end financial reporting.
The most used software to calculate tax provisioning is – by far – Excel. The reason for this is that most businesses are small and there is no need for excessive reporting. However, when companies grow they should make sure they are not spending too much time on maintaining the Excel based process. Spreadsheets are prone to errors, and they must be manually checked against other data sources.
An unified EPM system will significantly simplify the tax provisioning process. By allowing the tax and finance teams to work in the same system, you have one source of the truth where all required data is available. Since all financial data is loaded and consolidated in OneStream, any change or adjustment will be automatically reflected in your tax provisioning numbers.
One should consider EPM software when the organization has a certain size or complexity or is stock listed. Complexity increases for example when dealing with changing FX rates, dealing with multiple tax legislations or regular merges and acquisitions. Moreover, when a company has a net income with more than 8 figures, it is definitely time to consider a modern EPM system.
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